OI

Business Context and Reporting Period

Company: Owens-Illinois, Inc. (O-I Glass, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: The Company is the world's largest manufacturer of glass containers and a leading manufacturer of healthcare packaging and plastic closures. Operations are conducted in two segments: Glass Containers (89% of 2005 sales) and Plastics Packaging (11% of 2005 sales). The Company operates in over 20 countries with a significant presence in Europe, North America, Asia Pacific, and South America.

Key Financial Metrics (2005)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15.5% to $7.079 billion, driven primarily by the BSN Glasspack acquisition (completed June 2004), favorable foreign currency exchange rates, and improved pricing.
• Profitability Decline: Despite a 7.3% increase in Segment Operating Profit to $828.6 million, the Company reported a net loss of $558.6 million compared to a net profit of $235.5 million in 2004. This reversal was caused by significant non-operating charges.
• Major Charges: The 2005 results were materially impacted by:
  • A $494.0 million goodwill impairment charge in the Asia-Pacific Glass unit.
  • A $306.6 million charge to increase the valuation allowance on U.S. deferred tax assets.
  • A $135.0 million charge to increase the reserve for asbestos-related costs.
• Debt Reduction: Total debt decreased by $63 million to $5.30 billion, reaching its lowest level since 1998, excluding the impact of a change in the European accounts receivable securitization program.

Guidance, Outlook, and Risks

Management Commentary:

• Strategy: Focus remains on European integration, global procurement, and improving liquidity. The Company expects the European integration strategy to lead to significant earnings improvement by the end of 2006.
• Asbestos: Cash payments for asbestos-related costs were $171.1 million in 2005, a 10% decrease from 2004. The Company anticipates payments in 2006 will be moderately lower than 2005.
• Energy Costs: Higher energy costs negatively impacted the Glass Containers segment operating profit by $75.7 million in 2005. The Company uses commodity futures to hedge a portion of these risks.

Key Risks and Contingencies:

• Asbestos Liability: The Company faces substantial contingent liability from historical asbestos production. While the reserve was increased by $135 million in 2005, the ultimate liability cannot be estimated with certainty.
• Leverage: Substantial indebtedness ($5.3 billion) limits financial flexibility and increases vulnerability to economic downturns and interest rate fluctuations.
• Goodwill Impairment: Future changes in projected cash flows or cost of capital could trigger additional goodwill write-downs, materially affecting net worth.
• Pension Plans: If the Accumulated Benefit Obligation (ABO) of principal pension plans exceeds fair value of assets in 2006, the Company may be required to record a significant non-cash charge, reducing net worth.

Investor Verification Checklist

• Asbestos Reserve Adequacy: Verify the assumptions used for the $135 million asbestos charge and the total accrued liability of approximately $2.99 billion.
• Deferred Tax Valuation Allowance: Assess the sustainability of the $306.6 million valuation allowance charge and the Company's ability to realize deferred tax assets in the near term.
• Goodwill Impairment: Review the valuation methodology for the Asia-Pacific Glass unit and monitor competitive pricing pressures in Australia that led to the $494 million write-down.
• Debt Covenants: Confirm compliance with financial covenants in the Secured Credit Agreement, particularly fixed charge coverage and leverage ratios, given the high debt load.
• Pension Funding Status: Monitor the funded status of U.S. and international pension plans to assess the risk of a minimum pension liability charge in 2006.